Bitcoin and Cryptocurrency Technologies

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Introduction to the book There’s a lot of excitement about Bitcoin and cryptocurrencies. Optimists claim that Bitcoin will fundamentally alter payments, economics, and even politics around the world. Pessimists claim Bitcoin is inherently broken and will suffer an inevitable and spectacular collapse. Underlying these differing views is significant confusion about what Bitcoin is and how it works. We wrote this book to help cut through the hype and get to the core of what makes Bitcoin unique. To really understand what is special about Bitcoin, we need to understand how it works at a technical level. Bitcoin truly is a new technology and we can only get so far by explaining it through simple analogies to past technologies. We’ll assume that you have a basic understanding of computer science — how computers work, data structures and algorithms, and some programming experience. If you’re an undergraduate or graduate student of computer science, a software developer, an entrepreneur, or a technology hobbyist, this textbook is for you. In this book we’ll address the important questions about Bitcoin. How does Bitcoin work? What makes it different? How secure are your bitcoins? How anonymous are Bitcoin users? What applications can we build using Bitcoin as a platform? Can cryptocurrencies be regulated? If we were designing a new cryptocurrency today, what would we change? What might the future hold? Each chapter has a series of homework questions to help you understand these questions at a deeper level. In addition, there is a series of programming assignments in which you’ll implement various components of Bitcoin in simplified models. If you’re an auditory learner, most of the material of this book is also available as a series of video lectures. You can find all these on our Coursera course. You should also supplement your learning with information you can find online including the Bitcoin wiki, forums, and research papers, and by interacting with your peers and the Bitcoin community. After reading this book, you’ll know everything you need to be able to separate fact from fiction when reading claims about Bitcoin and other cryptocurrencies. You’ll have the conceptual foundations you need to engineer secure software that interacts with the Bitcoin network. And you’ll be able to integrate ideas from Bitcoin into your own projects. A note of thanks We’re immensely grateful to the students who helped develop programming assignments and to everyone who provided feedback on the drafts of this book. Princeton students Shivam Agarwal, Miles Carlsten, Paul Ellenbogen, Pranav Gokhale, Alex Iriza, Harry Kalodner, and Dillon Reisman, and Stanford students Allison Berke, Benedikt Bünz, and Alex Leishman deserve special praise. We’re also thankful to Dan Boneh and Albert Szmigielski. 2
Preface — The Long Road to Bitcoin The path to Bitcoin is littered with the corpses of failed attempts. I’ve compiled a list of about a hundred cryptographic payment systems, both e-cash and credit card based technologies, that are notable in some way. Some are academic proposals that have been well cited while others are actual systems that were deployed and tested. Of all the names on this list, there’s probably only one that you recognize — PayPal. And PayPal survived only because it quickly pivoted away from its original idea of cryptographic payments on hand-held devices! There’s a lot to learn from this history. Where do the ideas in Bitcoin come from? Why do some technologies survive while many others die? What does it take for complex technical innovations to be successfully commercialized? If nothing else, this story will give you an appreciation of how remarkable it is that we finally have a real, working payment mechanism that’s native to the Internet. Table 1: Notable electronic payment systems and proposals 3
Page 1: Bitcoin and Cryptocurrency Technolo
Page 5 and 6: work, there is also the issue of co
Page 7 and 8: Finally, CyberCash has the dubious
Page 9 and 10: This was the first serious digital
Page 11 and 12: and so on — powers of two. That w
Page 13 and 14: Figure 3 shows the user side of the
Page 15 and 16: initial cost to acquire all the equ
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Page 19 and 20: original design. However, after Bit
Page 21 and 22: A final reason that’s often cited
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Page 25 and 26: Figure 1.2 Because the number of
Page 27 and 28: Property 2: Hiding The second pr
Page 29 and 30: ecome: ● ● Hiding: Given H(
Page 31 and 32: SHA‐256 uses a compression functi
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Page 35 and 36: Figure 1.7 Merkle tree. In a Mer
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state of the system. The implicatio
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consensus is somewhat pessimistic,
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Implicit Consensus. This assumpt
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Figure 2.2 A double spend attempt.
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In general, the more confirmations
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Figure 2.4 The block reward is c
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puzzle‐friendliness property from
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possible outcomes, and the probabil
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theory problem that’s not easily
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this interlocking interdependence b
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Further reading The Bitcoin whitepa
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Chapter 3: Mechanics of Bitcoin Thi
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In this example, Alice specifies tw
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3.2 Bitcoin Scripts Each transactio
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the Bitcoin language and one has to
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exactly the same script, which is i
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in the normal case, this isn’t th
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Technically all of these transactio
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The header mostly contains informat
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in turn sends it to all of its peer
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Figure 3.10 Block propagation ti
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that actually affect them. So they
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that the old version would accept a
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Exercises 1. Transaction validation
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Chapter 4: How to Store and Use Bit
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software can automatically turn the
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The cryptographic magic that makes
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may never know (or care) who the co
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Given this stringent requirement, s
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There is a formula called Lagrange
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Ideally, the site will encrypt thos
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seen exchanges that fail due to bre
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Figure 4.5: Proof of liabilities.
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crypto and we won’t cover it here
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Figure 4.8: Payment process involvi
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transaction can't create coins, but
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of U.S. dollars per day pass throug
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Now if you look at a particular sec
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alance of 500,000 BTC. It then sign
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Chapter 5: Bitcoin Mining This chap
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In most cases you'll try every sing
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You can see in Figure 5.3 that over
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steady‐state, the period to find
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TARGET=(65535
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Disadvantages of GPU mining. GPU
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may be the fastest turnaround time
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Figure 5.10: Evolution of mining
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Hopefully, over time the embodied e
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Still, if we could replace Bitcoin
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Figure 5.11: Illustration of uncert
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Figure 5.13: Mining rewards. Thr
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Some mining hardware even supports
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By April 2015, the situation looks
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Figure 5.15 Forking attack.A mal
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Temporary block‐withholding attac
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the transaction from address X
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Chapter 6: Bitcoin and Anonymity
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Unlinkability. To understand unl
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eason is that use cases that we cla
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But this reveals something. The tra
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the other hand, are often not new a
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Figure 6.5. Labeled clusters.
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Luckily, this is a problem of commu
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they are unhappy with anonymity pro
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Fees should be all-or-nothing. M
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Somebody looking at this transactio
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a single transaction that combines
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just minting one doesn’t automati
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Efficiency. Recall the statement
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We start with Bitcoin itself, which
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An alternative design to Zerocoin i
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elieve the same thing. So consensus
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of developers who maintain Bitcoin
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The interesting case is if the fork
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eing effectively bankrupt. As of ea
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In an important sense it doesn't ma
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of illegal items becomes potentiall
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arrest. So although Ulbricht was th
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kind of business that will handle l
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een enough time for sellers to buil
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The text refers to “activities in
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A book that looks at the history of
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It’s easy to see how Bitcoin’s
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Why might memory‐hard and memory
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Until recently, it wasn’t known i
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meaning the exponential growth peri
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Next, consider the problem that SET
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In Permacoin, each miner Msto
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Interestingly, these concerns have
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they can perform the signatures on
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schemes also require a small amount
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to provide an effective solution, t
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Chapter 9: Bitcoin as a Platform In
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means that if you actuallydo
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CommitCoin exploits this property.
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features without needing to change
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would just look like a dollar bill.
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you. In particular, you can’t use
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To solve this problem we can once a
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NBA draft lottery.One example th
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that there’s no way for anyone to
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to predict the low‐level fluctuat
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design, because miners have to veri
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Here's another example, this time f
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You can also trade shares for futur
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Order books.The final piece o
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Chapter 10: Altcoins and the Crypto
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Attracting miners has special impor
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with the launch date of the altcoin
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Namecoin is technically interesting
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10.3 Relationship Between Bitcoin a
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Switching costs are certainly not z
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If our altcoin is merge‐mined, we
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When we think about a rational mine
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DepositA [Altcoin block chain] Refu
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Sidechains. The sidechains vision i
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lock themselves could tell us. This
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written in bytecode and executed by
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Bitcoin. In particular, there are c
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The simple binary Merkle tree used
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Chapter 11: Decentralized Instituti
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Bitcoin, Alice can remotely transfe
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only these signatures of limited fo
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11.3 Template for Decentralization
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Sidebar: trust.Some people in th
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competition among intermediaries. P
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To drive home the mismatch between
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Conclusion to the book Some people
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